EU weighs extending free carbon allowances for industries investing in Europe

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EU free carbon allowances extension

Highlights

European Commission proposes extending free emissions allowances beyond 2039 for industries that commit to investment in Europe, shifting from current ETS phase-out timeline.
The EU is considering offering $30 billion in ETS allowances before 2030 to support industrial upgrades in eastern and central member states facing funding challenges.
The review may expand carbon pricing to the waste sector and extra-EU flights, with announcement expected in mid-July and significant internal resistance from impacted countries.

ETS review links free permits to investment

As reported by the Financial Times, an internal document shows the European Commission is preparing a revision of the EU emissions trading system that would prolong free emissions allowances for industry while tying that support to what it calls much-needed investment inside Europe.

The proposal would acknowledge that hard-to-abate emissions are likely to persist after 2040 and that industries need more time to adapt infrastructure and technologies to decarbonise. The move marks a shift from the current schedule, under which free allocations are due to end in 2039.

The ETS, launched in 2005, covers about 40 per cent of Europe’s emissions and requires companies to buy or hold permits for their CO2 output. It generated more than 43 billion euros in revenue in 2025, most of which flows back to member states, but it has also drawn criticism from companies and governments that say it raises costs too sharply.

The Commission is also weighing whether to extend carbon pricing to the waste sector and to flights departing the bloc. Those options face internal resistance over concerns about economic damage and are also likely to encounter opposition from member states.

Industry and member states push for concessions

Debate over the ETS review is intensifying as the bloc adapts the system to its 2040 climate goal of cutting greenhouse gas emissions by 90 per cent from 1990 levels. Resistance is strongest in countries still heavily reliant on fossil fuels, including Poland, where carbon costs account for a large share of wholesale electricity prices.

Italy, which depends heavily on gas-fired power, has stepped back from its February call to suspend the scheme, while six eastern and central member states have asked for a solidarity mechanism to support their transition. In response, the Commission is considering making 30 billion dollars of ETS allowances available before 2030 as an investment booster for countries struggling to fund industrial upgrades.

At the same time, companies that have already committed substantial decarbonisation spending are seeking to preserve their competitive position. Swedish steelmaker SSAB has committed 6 billion euros to decarbonise operations in Sweden and is weighing a further investment in a new mill in Finland; executive vice-president Helena Norman says the timing of those investments depends on the schedule for phasing out free allocations.

Peter Liese, a German centre-right member of the European Parliament and an ETS specialist, says the emerging plans are likely to be more digestible for industry than the current system. The Commission is set to present its review in mid-July.

Our earlier coverage of U.S. transportation inflation highlighted how surging fuel prices drove a sharp rise in transportation-related consumer costs and became a major contributor to headline CPI. We noted that higher energy and travel costs were feeding quickly through to areas like motor fuel and airfares, shaping expectations around broader economic policy and cost pressures.

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